Forward with financial services

The real potential for Australia in Asia over the next 20 years will be in services. Financial services is an obvious place to start and the government can get some quick wins at little or no cost to the budget.

As Australia’s largest industry, financial services accounts for 10.6 per cent of gross domestic product and its potential growth is exponential. Agriculture is only 2.5 per cent of GDP and its growth is constrained by physical factors.

There are opportunities in niche high-value-added manufacturing, but employment in manufacturing has shrunk 9 per cent over the past 20 years, whereas employment in financial services has risen by 24 per cent to 430,000, and the sector has averaged 6 per cent growth.

If the government wants trade with Asia to equal 33 per cent of GDP by 2025 it must urgently facilitate the export of financial services to Asia’s growing middle class.

The government already has a detailed plan for financial services. How it implements it is not just crucial for the financial services industry, it is also a test case for how it will provide and implement more detailed policies for other sectors.

The Johnson report – Australia as a Financial Centre: Building on our Strengths – was released in November 2009 and made 19 recommendations to position Australia as a leading financial services centre.

The report pinpoints twice as many jobs in financial services than in mining, as high-skill, high-wage jobs. Australia’s funds management industry is already focused on the region with $23.5 billion, or 73 per cent, of all funds managed from overseas sourced in the Asia-Pacific.

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To the credit of the current and former Ministers for Financial Services, respectively
Bill Shorten
and
Chris Bowen
, the implementation has commenced.

The government has embraced the Asia Region Funds Passport to create a harmonised financial services regulatory regime in Asia and would allow Australian financial services firms to sell financial products in multiple Asian countries. The concept was embraced at the APEC Finance Ministers’ meeting in September last year and Australia is leading further work on the passport.

The government has the Board of Taxation busy with separate inquiries into a new collective investment vehicle regime and the treatment of Islamic finance, banking and insurance products.

But the government needs to move quickly to introduce these initiatives if we are to maintain our advantages over competitor countries in the region. Australia’s existing tax treatment of foreign funds managed by Australian managers is complicated and disadvantages us relative to other fund management hubs in Asia such as Singapore and Hong Kong.

One of Johnson’s central recommendations was the introduction of a new tax regime, known as an investment manager regime (IMR), to address the uncertainty faced by foreign investors using Australian-based fund managers. An IMR would put Australia on par with New York, London, Tokyo, Singapore and Hong Kong, which all have comparable regimes in place.

Australia has only partially implemented an IMR, with several critical elements yet to be legislated. Quick wins can still be achieved if the government reprioritises its agenda following the release of the Asian Century white paper.

With every delay, Australia loses credibility and falls further behind our competitors in the region.

This is why it is critically important to implement all of the Johnson reforms in a timely and co-ordinated manner.

The other significant measure taken by the government was to align withholding tax paid by foreign investors in Australia to other tax regimes in the region, to make Australia competitive with other funds management hubs by encouraging foreigners to use Australian fund managers.

This measure was working. About $50 billion of funds are invested by foreigners through Australian fund managers. The fees paid for managing these funds generate profits, tax revenue, employment, income and, ultimately, economic growth.

But the government doubled the withholding tax rate in the 2012 budget. This must be reviewed and renewed in the 2013-14 budget.

If the government wants to show its commitment it would do well to complete implementation of the Johnson review rapidly and reverse its decision to double withholding tax in Australia.